Federal Reserve Bank of Richmond President Jeffrey Lacker said on Wednesday that assessing the credit market turmoil that started this summer may take more time and that the Fed did the right thing in making funds available, albeit at a cost.
It may be some time before we have a full understanding of this summer's events, he told the International Association of Credit Portfolio Managers, referring to a seizing up in credit markets stemming from losses in the U.S. mortgage market.
My reading of the evidence is that the episode was less about liquidity than it was simply about a dramatic change in the valuation of a class of credit exposures, he added.
Lacker did not directly address the current economic or interest rate outlook in his remarks.
The Fed, the U.S. central bank, initially responded to the credit crisis by providing ample liquidity to markets and cutting the discount rate to make it easier for banks to tap funds directly from the Fed.
The Fed ultimately cut the benchmark federal funds rate by a cumulative three quarters of a percentage point in September and October to offset potential economic fallout from the market turmoil.
The fed funds rate is now at 4.50 percent while the discount rate is 5 percent.
On the Fed's response to the credit market turmoil, Lacker said: We stood ready to lend -- on good collateral at a penalty rate -- but did not interfere with the market's assessment of risks.
So I think there's a good chance that, when all is said and done, we will be able to say that the Fed did the right thing.
The Fed's next monetary policy meeting is on December 11. Lacker is not a voting member this year on its rate-setting committee.